2. Working with Numbers and Graphs Q2 The following graphs show the aggregate de

Question

2. Working with Numbers and Graphs Q2 The following graphs show the aggregate demand curve and the short-run aggregate supply curve for an economy. Adjust the following graph to show the short-run effect of an increase in wealth on the price level and on Real GDP

Suppose there is an increase in SRAS that is greater than an increase in AD.

Use the following graph to answer the question that follows. You will not be graded on any changes you make to the graph.

Adjust the following graph to show the short-run effect of a decrease in wage rates on the price level and on Real GDP AD SRAS REAL GDP

Explanation / Answer

NOTE- Answers are given in BOLD and explanation is given in brackets.

(Increase in Wealth leads to an increase in AD, AD shifts right. At the same SRAS, when AD shifts right, price level rises, producers supply more goods, therefore, real GDP rises.)

ANS- The price increases, and the real GDP increases.

(Leads to fall in AS, as less labour will be available for production, Output will decrease. Leading to rise in prices Real GDP will fall )

ANS- The price increases, and the real GDP decreases.

(Labour productivity rises, AS shift right as output increases. Real GDP rises along with Prices.)

ANS- The price increases, and the real GDP increases.

(AD falls leading to a fall in prices and real GDP, SRAS increases leading to a fall in prices and rise in real GDP. Hence price level falls. Since fall in AD is more than rise in SRAS, Real GDP also falls)

ANS- The price decreases, and the real GDP decreases.

(SRAS increases leading to a fall in prices and rise in real GDP, AD rises leading to a rise in prices and real GDP. Since change in SRAS is more, Price will fall and Real GDP rises )

ANS- The price decreases, and the real GDP increases.

(SRAS increases leading to a fall in prices and rise in real GDP, AD rises leading to a rise in prices and real GDP. Since change in AD is more, Price will fall and Real GDP rises )

ANS- The price increases, and the real GDP increases.

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